Shaky ways to get out of the hole

Wednesday

Jan 30, 2008 at 3:15 AMJan 30, 2008 at 5:09 AM

The economy hasn't tanked, but it's standing on the edge.

Interest rate cuts and rebates have done little to raise the confidence level of the American people. Both are meant to jump-start a declining economy — an economy no candidate for president seems prepared to handle.

Rebates promise less than rate cuts.

It's a package meant to spark consumer spending which in turn will fire up business and industry. The glitch in the plan is there is no being certain the $150 billion will seep back into the economy.

Rebate checks — $600 to $1,200 — will not begin to show up in mailboxes until sometime in the summer. While it takes time to set the process in motion, it's worth noting the check won't be in the mail for at least a month or two after you've sent your own check to Uncle Sam. While surely not planned in such a way, it keeps taxpayers from using rebates to pay what they're said to owe.

What part of a rebate will be used to stimulate the economy and what part will be used to pay past due credit card, mortgage and other debt? We don't see Americans rushing out to buy flat-screen television sets or new cars with their newfound wealth. The kind of spending both Republicans and Democrats are urging Americans to engage in is more likely to encourage them to widen their income-to debt-ratio even further.

The current wave of interest-rate reductions has the appearance of something better than rebates. But even they are chancy.

Dominion over interest rates is the tool used by the Federal Reserve to stabilize the economy. The Fed in years past has focused on keeping a tight rein on inflation,

Last week the Fed announced a rare three-quarter-point reduction. Another half-point drop is in the wind for this week as Chairman Ben Bernanke and his colleagues gather around their table.

A point and a quarter in less than two weeks? It sounds like the central bank is struggling to keep the economy from going into free fall.

There is even speculation that the Federal Reserve will keep dropping rates for the rest of the year. To what point. In theory at least, interest rates cannot fall below zero.

Last week's rate reduction brings the federal fund rate — the Fed's key rate and the one that has the most influence on the nation's economy — to 3.5 percent. It's expected to reach 3.0 by the time the Fed concludes its two-day meeting this week.

If the Federal Reserve continues to cut rates, as some economists predict, dangers lurk in their wake.

Jean Aversa, an economics writer for The Associated Press, offers the following traps into which people might fall if they become consumed by the rate-cutting binge.

— Lower rates could aggravate inflation, further weakening the U.S. dollar and its place in world trade.

— Savings accounts, certificates of deposit, money market mutual funds and other savings instruments could be pounded by a string of reductions, particularly affecting the country's older population.

— Low rates, over time, could lead people to live a lifestyle they cannot afford. "You could see a restart of that was so prevalent just a couple of years ago, where borrowers were relying on home equity lines of credit to fund their discretionary spending," said Greg McBride, senior financial analyst at Bankrate.com.

— Finally, low interest rates could draw borrowers to adjustable-rate mortgages, without thinking of their affordability if rates climbed to something that contributed to todays' housing bust and the record number of people forced from their homes by rising interest rates and weak home values.

We know there was a shovel with which we dug the hole we're in. Are we using ladders strong enough to let us climb out?